Deal Making 2011 Style

Scott Lawlor recently reached a deal to recapitalize this building at 450 West 33rd St. in New York.

In the past three years, deal maker Scott Lawlor lost Boston’s tallest skyscraper to foreclosure, wrote down his $600 million private-equity fund to zero and became a high-profile example of the commercial-property industry’s excesses.

So, as he dusts himself off and sets out to start buying again in a much different world, it isn’t surprising that he is using a different investment model.

“The fund business isn’t what it used to be,” Mr. Lawlor acknowledged in an interview last week at his office on Manhattan’s Third Avenue, blocks from the gleaming space in the Seagram Building on Park Avenue that his firm, Broadway Partners, used to occupy.

“If there were 50 guys that could raise a billion in discretionary dollars four years ago, and I was one of them, maybe there’s 10 today,” he said. “And I’m not one of them.”

Instead, Mr. Lawlor is close to an agreement with publicly traded Winthrop Realty Trust, in which the two would buy office buildings together, according to people familiar with the matter. The deal’s tentative outline, which could still change, is that Winthrop would provide Mr. Lawlor with about $100 million in cash to make acquisitions.

Mr. Lawlor would then sell stakes to his investors, allowing the cash to be “recycled” into new deals, these people say. With each acquisition, Winthrop would have the right to sign off and the option to keep a stake, these people say.

Michael Ashner, Winthrop’s chief executive, said Broadway’s losses in recent years were a reflection of the times, not Mr. Lawlor’s abilities.

“I wouldn’t have him as my partner if I didn’t think he had character, integrity and acumen,” Mr. Ashner said. “In any potential business relationship, I am comfortable in my ability with respect to financial decisions, and I am comfortable in his ability to source potential acquisitions.”

Mr. Lawlor’s attempt at a renaissance shows how some of the most prominent players are changing their strategy in the wake of a harrowing two years for the industry.

Traditional private-equity real-estate funds, which had a lot of discretion on how to spend the funds they raised, are out of favor with many institutional investors. Instead, many fund managers are focusing on setting up separate accounts in which investors have more say over what kind of deals get done, and on arranging one-time acquisitions for which they then line up investors.

A survey conducted late last year by research firm Preqin found that just 45% of institutional investors around the world planned to invest in real-estate funds in 2011, down from 84% in 2009. One of America’s biggest property investors, the California Public Employees Retirement System, adopted a new real-estate strategy this year that will avoid funds in favor of accounts managed specifically on Calpers’ behalf by a small stable of hand-picked managers.

Many onetime highfliers have avoided flashy purchases in recent years, focusing on small acquisitions and on reworking debt in order to salvage some of their investors’ capital—in the hopes of getting a new investment sometime down the road.

After three years of scrambling to shore up troubled properties, Broadway Partners appears close to stabilizing what is left of its portfolio.

Within the past month, the company has reached deals to maintain a grip on numerous properties that were overleveraged, cutting deals with lenders or new investors in order to stay involved, typically with a diminished stake.

Broadway, for example, has reached a tentative agreement with Lehman Brothers Holdings Inc. for the two companies to split up ownership of five office buildings in which both have a debt or equity stake, according to people familiar with the discussions.

Under the terms of the deal, Broadway would cede to Lehman ownership of 237 Park Ave., a 1.2 million-square-foot Manhattan office building with $1.2 billion in debt, and a 472,000-square-foot office building at 1000 Wilshire Blvd. in Los Angeles, the people said.

In turn, Broadway Partners would partner with Fortress Investment Group to take control of 50 Beale St. in San Francisco and Winthrop Realty Trust for 100 California St. in San Francisco and 116 Huntington Ave. in Boston, the people said. The deal came as junior debt holders on some of the properties, including Westbrook Partners, sought buyers for their positions in recent months.

The Lehman deal follows an agreement to keep a minority stake in the 1.2 million-square-foot 280 Park Ave. in Manhattan, ceding the bulk of the equity to lenders SL Green Realty Corp. andVornado Realty Trust, according to people familiar with the matter. Earlier this month, Broadway formed a joint venture in its office building at 450 West 33rd St. in New York with Brookfield Office Properties in a bid to recapitalize the 1.6 million-square-foot building.

Should the tentative deals go through, Broadway would be left with nine properties in which it still has significant stakes, down from more than 20 at its peak.

Mr. Lawlor says he bought his first property in four years last week, closing on the purchase of an apartment building near Houston for $17 million on behalf of several dozen wealthy individuals, many of them existing investors in Broadway funds. If he secures the acquisition facility with Winthrop, he will have firepower to do bigger deals again. (credit a, troianovski, e, brown, wsj)